Best approach for RDP station?

I'm looking at building a Win7 based RDP OS for an old PC with 512MB RAM. It's currently running XP Portable for that purpose but is having some issues with freezing and there's been some improvements to the RDP client in Win7 which might be useful (the server is running Win7 x64 Ultimate)

As it's only being used for RDP and occasionally running Opera or Iron Portable to play online videos that don't currently work over RDP (although they might using Win7 instead of XP), I don't really want to use a full bloated Win7 install so have been looking at Win7PESE, which is OK but I'd prefer to be able to make settings stick, so that PeNetwork doesn't have to run at each boot to setup the Network, hardware doesn't have to be detected and Visual and mouse/keyboard settings can be set.

I'm also not sure if it's advisable to use an unpatched Win7PE as the Host, even though it's mostly only being used as a RDP station, in case that leaves it vulnerable as an attack vector into the network. I certainly need to use the RDP patches at least.

I did look at Windows7 Embedded a while back but got a bit lost working out how to build it so if that would be suitable, maybe there's a guide someone could point me to that might help. Maybe Win7 ThinPC would be a possibility but it seems that has to be installed on the intended system and as that's not where I am, it's perhaps easier to use something I can build into an ISO/VHD here to then take there and boot with grub4dos. The system also only has a small (20GB) HDD which doesn't have much free space anyway, so it's tricky to install an OS on the system. I've got a 16GB CF card I could use but I'm not sure if Win7 will install to that, although it will probably be able to boot an ISO/VHD from it (Linux boots and runs fine from it but XP freezes unless I hide it with grub4dos before booting and if I unhide it after XP Portable has booted, it locks up straight away!)

It looks like ThinPC has a larger footprint than WES7 (I'm more concerned with RAM than HDD space). I'll probably try Wimb's W7 Universal first as I'm somewhat familiar with the process having used it for XP and then try WES7 to compare.

Well W7 Universal didn't work out too well. It's installed and boots OK and doesn't use much RAM but when I use Remote Desktop to connect to the server PC, it goes extremely laggy, whereas on XP it works fine (apart from the fact that it's impossible to play youtube videos (or any other videos) over RDP without the audio constantly breaking up and the video playing at about 4fps, which is the main reason I'm trying to use Win7's better RDP).

Well, that amount of RAM is barely sufficient for an XP, and is well "below standard" for a 7, I am not particularly surprised that it "chokes".

Among all activities you can do on a PC, streaming video is one of the most Ram demanding, and Opera (while being otherwise a very good browser, probably the best one around) is in itself a "memory hog".

Well you say that but it was only using about 250MB when booted and then I was only running remote desktop to connect to the other PC and it was only the RDP that was unusable and extremely laggy/unresponsive, so I doubt it was a RAM problem but maybe something's not right with the NIC or the GPU driver/settings. Running Iron Portable locally on the client under Win7 was fine (as it is in XP).

I didn't even get to try streaming video over RDP in Win7 as the RDP was so bad. What I was hoping is that with Win7 on the client, RDP would use it's fancy features to decode the video on the server and then stream it over the RDP, rather than the client having to decode it (which it seems the FX5200 I bought can't help with).

In XP, which can't use the latest RDP features, it just sends the video to the client to decode. I can play low-res youtube videos directly on the client in Iron Portable (haven't got IE installed so haven't tried that and I'm not sure if I tried Opera) without the audio breaking up and the video's bearable (probably running at about 20fps, whereas over the RDP it runs at about 4fps), it's just clunky for the user to have to copy the link from their e-mail or browser in the RDP session, minimise the RDP window, open Iron Portable and paste the link into there!

The owner has asked if she should just buy a new PC but it seems silly to spend money when all she really needs is a dumb terminal. Besides, there's no guarantee that the new PC will play video OK over the RDP session as that may only work when the client has certain hardware (videocard predominantly). I guess with a better PC she could run the apps she uses (mostly IE and Thunderbird) locally but still keep the data files on the server PC, which makes it easier to backup.

I might play with a Raspberry Pi running Linux sometime to see if that makes a better client than her current PC but it still probably won't be able to stream video over RDP as that feature relies on Windows 7 and the latest remote desktop on both server and client.

Well you say that but it was only using about 250MB when booted and then I was only running remote desktop to connect to the other PC and it was only the RDP that was unusable and extremely laggy/unresponsive, so I doubt it was a RAM problem but maybe something's not right with the NIC or the GPU driver/settings. Running Iron Portable locally on the client under Win7 was fine (as it is in XP).

Good , then replace the current 512 Mb with 256 Mb and see if it behaves the same.
If it does not, try adding 1 Gb of RAM and see if it still behaves the same.
If it does not, try adding 2 Gb of RAM and make a RAM based mini-OS and see if it still behaves the same.

Of course if the NIC and/or the actual network/cables/hubs/routers/TCP-IP stack/etc. are mis-configured the amount of Ram would not be that much relevant.